Over the years I have watched enough Federal Reserve Chairman testimony to Congress to last a lifetime. While it is always amusing to watch the head of the Federal Reserve dance around questions from the people’s elected representatives, the queries go from just plain stupid to completely partisan in a heartbeat. In between you sometimes get an intelligent question, but on the whole it is hardly a forum for sophisticated economic debate.
Yet I have never seen the level of animosity that Yellen experienced yesterday. The attacks were just vicious. The topics ranged from the legal authority of the Federal Reserve to charge negative rates to Yellen’s apparent refusal to comply with a subpoena request to provide information regarding an information leak within the Federal Reserve. To add insult to injury, there was a healthy contingent of Congressmen pushing for the Federal Reserve to adopt a rule based system to set rates.
After sitting through the few hours of excruciating testimony, I came away with three main conclusions:
- Although Yellen briefly acknowledged the global financial strains, her willingness to deviate from her stated tightening path was much less than the market expected (hoped?). It appears the Federal Reserve still has blinders on regarding the financial meltdown. They refuse to accept their actions were the cause of the sell off. Since they are staring at rear looking economic indicators, they just keep repeating the line that the US economy is in good shape. Saying it out loud doesn’t make it so. Chairperson Yellen’s comments just reaffirmed the true extent to which the Federal Reserve is asleep at the wheel.
- As we have seen with the rise of non-establishment candidates such as Trump and Sanders, people are bitterly angry. I don’t blame them one bit. They should be mad at the crony capitalism that has swept through the system. But regardless of whether you agree with my opinion, there can be no denying the people are looking for someone to blame. As traders we shouldn’t debate the correctness of the current situation, but merely acknowledge it and determine what it means for the markets. The vitriol unleashed on Yellen was shocking. Rightly or wrongly, the Federal Reserve has become a lightning rod for the rising level of inequality. I think this has profound ramifications for markets. Given this harsh attitude regarding Fed intervention, it increases the chances the Fed does nothing. We are in desperate need of leadership from the Federal Reserve, but the public is telling them to buzz off and mind their own business. This is a terrible, unambiguously negative development for risk assets.
- Finally the desire to put the Federal Reserve on a systematic rules based policy is completely asinine. As I discussed yesterday, any attempt to normalize policy will cause a massive balance sheet recession. It is just like politicians to try to fix a problem years after the horse has left the barn. The time to put the US economy on a rules based system was in the mid 1980s, or maybe even as late as Greenspan’s irrational exuberance speech in 1996. Since then there is only way one out - to inflate the debt away.
All of yesterday’s developments make the Fed much less likely to come to the market’s rescue. The Federal Reserve has rammed the Titanic into the iceberg, but are convinced they are still in charge and everything will be fine. Nothing could be further from the truth.
There seems to be a lot of bewilderment about the US dollar sell off versus the Yen and the Euro. I actually think it is pretty simple. In mid December China announced they would tie the Yuan to a basket of currencies. If you have a currency that was previously tied to one currency, but has now shifted to a group, the obvious outcome is for you to sell the original currency and buy the new basket.
The real question you should ask is whether China has included another non-traditional currency in that basket. I know if I were China, I would…
Thanks for reading,